TerraUSD’s $45 Billion Face Factory Creates A Host Of Crypto Losers

The rapid collapse of a once-popular cryptocurrency pair has had a ripple effect across the industry, contributing to plummeting coin prices that have wiped out hundreds of billions of market value.

The cancellation this week of the algorithmic stablecoin TerraUSD and its sister token Luna has ramifications for all of crypto. First, there’s the immediate impact: the rapid collapse of a once-popular cryptocurrency pair has caused a ripple effect across the industry, contributing to plummeting cryptocurrency prices. coins that has wiped hundreds of billions of market value from the digital asset market and stoked concerns about the potential fragility of digital asset businesses.

Then there are the ripple effects. As well as bringing punitive losses to individual users and investment firms, the dramatic failure of a market darling like Terra threatens to have a chilling effect on the fundraisings that have driven valuations higher. crypto startups in recent years. Venture capitalists who have long been among the industry’s biggest cheerleaders may not have quite the same tolerance for risk today, especially those caught directly in the crossfire.

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“This is something of a magnitude that crypto has really never seen in terms of an absolute implosion of a top-five project,” said Matt Walsh, founding partner of Castle Island Ventures, a tech firm. blockchain-focused venture capital. Nearly $45 billion evaporated from the market caps of TerraUSD (known as UST) and Luna in a week, according to CoinGecko.

There were a few winners in this scenario – such as investment firms, including F9 Research, which sold TerraUSD (known as UST). Stablecoins backed by reserves rather than algorithms have also proven to be better options. But it’s the losses from those bruises of the past few days that will resonate.

Individual holders of UST and Luna, the token that is part of the algorithmic stablecoin’s peg mechanism, are now deep in the red, with tweets lamenting dotted fortunes flooding Crypto Twitter this week.

“The biggest losers from all of this will be retail [investors] who didn’t understand the risks they were taking,” said Kyle Samani, co-founder and managing partner of crypto-VC firm Multicoin Capital.

Other losers include venture capitalists and investment firms that backed Terraform Labs, the startup behind UST, and Luna Foundation Guard, the nonprofit that runs the Luna token. Galaxy Digital Holdings Ltd., Pantera Capital and Lightspeed Venture Partners invested in Terraform’s latest $150 million fundraising in July, while Jump Crypto and Three Arrows Capital participated in a $1 billion token sale Luna in February.

These backers, who once hoped their investments would yield massive returns, instead found themselves tapped to back UST and Luna in a $1.5 billion safety net. Essentially, they were asked to “put their money where their mouth is,” a test of whether these institutions actually believe in what they’re investing in, said Billy Dishman, investment and research analyst at the firm. of Crypto-VC CoinFund. So far, they haven’t shown much interest.

Terraform Labs is working on another contingency plan in which ownership of the blockchain network would be distributed to investors, according to a blog entry published Friday that was attributed to co-founder Do Kwon.

Investors and startups with no direct connection to UST also find themselves on shaky ground. Chris McCann and Edith Yeung, general partners at Race Capital — a venture capital firm that focuses on early-stage crypto startups — have heard of collapsing deals or repricing and said the founders were “ghosted” by potential investors. They are urging their portfolio companies to exercise caution and ensure that the funds they have raised so far are in fiat, not crypto.

“If you’re in the middle of a fundraising period, close it,” McCann added. “If you’re not, don’t do it now. It is not the moment.

Yeung said she also has a playbook in case a holding company gets into trouble. She said part of Race’s strategy is to find a better way for founders to communicate — long Twitter threads have the potential to fuel rumors and sow discord.

“I have a blog post template ready to go,” she said. “It’s kind of silly, but it’s happened so many times now.”

“Downstream Impact”

Walsh of Castle Island Ventures said later-stage companies are more likely to see valuation increases as they raise more funds due to their proximity to public markets, where stocks like Coinbase Global Inc. have fallen. Coinbase stock fell 35% this week and ended the week with a market value of $15 billion.

“Coinbase trades at a market cap of $17-18 billion, this is going to have a downstream impact on the business community in the crypto space,” Walsh said in an interview.

This will eventually trickle down to the seed stage, where new crypto startups could suffer valuation cuts, Walsh added. He said there could also be a shift in the types of companies investing in crypto, noting that many traditional funds have become more interested in the industry over the past year.

“There’s a question whether some of these funds are just tourists pulling back in the bear market,” Walsh said.

Traditional grip

Dana Stalder, general partner at tech venture capital firm Matrix Partners, said it’s important to note that it’s not just cryptocurrencies that are caught in a downturn: tech stocks are also struggling.

“There is a flight to safety out of the equity asset class,” Stalder said in an interview.

The company is still excited about its investment in crypto startup Lightspark, which it announced on Thursday. The company was founded by David Marcus, who left Meta Platforms Inc. last year after overseeing its crypto efforts. Lightspark is building infrastructure to help support payments for Bitcoin, which was trading below $29,000 Saturday morning in New York and is down about 25% this month.

“I don’t think this cycle will impact what the Lightspark team is building – it’s a very long piece,” he said.

Peter Fenton, Benchmark’s general partner, said there will likely be a downturn in crypto investing as many venture capitalists “play to their gains” and use returns from previous crypto investments. to finance new ones in space.

However, his company, which previously backed crypto startups Chainalysis and Sorare, is still engaged. Fenton said Benchmark plans to pursue three to five crypto investments a year because he still has faith in the industry and its startups.

“People forget that Google’s best financings were made in the worst risk years,” he said.